Microfinance institutions can now set interest rates

Microfinance institutions can now set interest rates

Part of: Prelims and GS-III Economy

Context: The Reserve Bank of India (RBI) allowed microfinance institutions the freedom to set interest rates on the loans that they lend.

Key takeaways 

• The guidelines will take effect from 1st April 2022.
• The RBI tweaked the definition of a microfinance loan to indicate a collateral-free loan given to a household having annual income of up to Rs. 3 lakh. 
  • Earlier, the upper limits were Rs. 1.2 lakh for rural borrowers and Rs. 2 lakh for urban borrowers.
• There shall be no prepayment penalty on microfinance loans.
• Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount.

Microfinance institutions

• Microfinance offers a solution to small business owners, who do not have access to banking and associated services. 
• These institutions offer services similar to that of a bank.
• They do charge interest on loans but the interest rate is lower than that charged by most banks in the country.
• They help small- and medium-sized businesses scale up with access to funds at the right time.
• They worked as an alternative, with an aim to create financial equality. 
• In India, there are two channels through which microfinance operates:
  • SHG – Bank Linkage Programme (SBLP)
  • Microfinance Institutions (MFIs)

News Source: TH